The chart Andrew Stiles referred to Friday (from an earlier post by Veronique de Rugy) shows only the start of how counterproductive it is to increase taxes on the wealthy. As a result of lower tax rates on the top income earners, not only do they pay a much larger share of all taxes, but they pay much more taxes total — and revenue to the government has increased. This is because lowering taxes on the rich creates more rich people and richer rich people. The federal government gets much more revenue if you impose a 40 percent tax on a large number of very wealthy millionaires than if you impose a 70 percent tax on a small number of less wealthy millionaires.

Every tax has a “revenue-maximizing” point well short of 100 percent. If a tax is set higher than its “revenue-maximizing” point, overall tax revenue to the government will decrease. This is the basic theory behind the Laffer Curve, which states that when taxes are zero percent, revenue to the government is (obviously) zero, but when taxes are 100 percent, revenue to the government is also zero, because by taxing all the income of a particular group of people, you kill all economic activity in that group, so you’re left with nothing to tax. Between those two extremes is a curve whereby revenue to the government rises as you increase taxes from zero percent, but begins to fall as you approach 100 percent taxation — that’s the Laffer Curve.

Arthur Laffer and Ford Scudder explore this phenomenon at length in their brilliant series The Onslaught from the Left. In keeping with what Veronique pointed out, they write, in Part II of the series:

In the year Ronald Reagan took office (1981) the top 1% of income earners as reflected by the Adjusted Gross Income of all tax filers paid 17.58 % of all federal income taxes. Twenty-five years later, in 2005 the top 1% paid 39.8% of all income taxes, representing a greater than doubling of the share of tax payments made by this group.

But even more to the point, from 1981 to 2005 the income taxes paid by the top 1% rose from 1.59% of GDP to 2.96% of GDP. In addition to the huge rise in the percent of GDP paid in income taxes by the top 1% of income earners and the more than doubling of the share of taxes paid by this group was the huge absolute increase in real taxes (2005 dollars using the GDP price deflator [in other words, adjusting for inflation - ML]) from 1981 through 2005. In 1981 total tax payments from from the richest 1% were $98.84 billion, while in 2005 the top 1% paid $368.13 billion in taxes; that’s a 288% increase in 25 years. In rough numbers, that means that each of the richest 1% of filers in 1981 paid a little over $100,000 in 2005 dollars, while in 2005 each filer on average paid over $288,000. And remember that’s inflation-adjusted dollars.”

This astonishing statistic is explained by a simple fact. As a result of reducing taxes on the rich, the rich got much richer — so much so that they wound up paying nearly four times as much total tax (and nearly three times as much tax per rich person) as when taxes were higher.

This also reveals the truth behind the increased income inequality that liberals love to cite as their chief evidence against supply-side economics. In fact, as Laffer explains in Part I of the Onslaught from the Left series, the poor have gotten richer — just not as quickly as the rich have. “The increasingly unequal distribution of income during the era of supply-side economics has resulted from the poor increasing their income at a rate that has not kept pace with the phenomenal gains in income the rich have experienced — not from the poor getting poorer.” He goes on to show that in fact, lower taxes rates have led both to higher income among the bottom 50 percent of income earners and lower total taxes paid by that group.

Most important of all, of course, is the fact that when the rich get richer, they invest more money in the economy, thereby stimulating economic growth. Democrats generally can’t stomach the rich getting richer, even when it means everyone is better off. But you’d think they would at least propose tax policy that increases government revenue. Alas, they so want to punish the rich that they are even willing to lower government revenue in the process. — Mario Loyola is director of the Center for Tenth Amendment Studies at the Texas Public Policy Foundation, the new of the Laffer Center for Supply-Side Economics.

Probably the biggest problem here is that no one knows what the Laffer Curve looks like, and the extremists on both sides have WILDLY different opinions on what they think it looks like. It is impossible to know for sure without a time machine and the ability to change tax rates.

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<ptp> how many emo kids does it take to change a lightbulb?
<Willy> HOW MANY?!
<ptp> none they just sit in the dark and cry

I agree that we should not raise capital gains until unemployment is under.... say, 8% at least? Preferably lower than 7% and we are in a clear recovery. (though generally speaking, a rate of 15% is just too low, barring the worst recession in 100 years)

All I'm arguing is that we are likely on the left side of the Laffer curve for income tax rates. If the top rates go up a few percent, its not going to hurt the country, and we need the money. The debt and deficit is just too high to solve with politically-impossible cuts, and even steep cuts are probably not going to happen if the Dems aren't thrown a bone here. They'd sooner default and campaign in 2012 on class warfare. (just as some in the GOP may possibly prefer to default rather than allow a few rich people take an almost unnoticably small hit on personal income taxes)

Really what we need is the BS spedning to be cut. I am not talking about SS, Medicare or Defense. I am talking about the cumulative effects of the pet projects, etc., that end up costing us billions.

The fact is the cumulative effect of politicians on both sides buying votes has finally caught up with us. The choice to focus on medicare and SS and the like is to generate fear and what not. That fat is what I am talking about. The bloated bureaucracy. The total amount of waste per $ spent. Excessive staffs. Excessive perks. The programs that fly low on or under the radar. The pandering to the SIG's. Excessive and bloated regulatory committees, etc.

While no single 1 of those instances will amount to much, the combined total is a lot.

All we are hearing is about cutting spedning in general and raising taxes but otherwise doing business as usual.

Do we really need a DHS?
Do we really need a Dept. of Energy?
Do we really need a Dept. of Education?

Or can those be rolled up and streamlined into other parts of the government if not cut out right? I'm not trying to pick on the Obama's but a classic example just in a nutshell is when you look at how many assistants the 1st Lady has. She has 43. 43! Nancy Reagan had 3. that can go all the way donw the line to the staffs of congress.

When a business gets in trouble the first thing it does is cut the fat and look for synergies in the effort to streamline operations and maximize productivity per $ spent on overhead. The Obama and Democratic answer to essentially maximize profit does not involve cost cutting. It is to just tax more so they can continue to spend more.

Really what we need is the BS spedning to be cut. I am not talking about SS, Medicare or Defense. I am talking about the cumulative effects of the pet projects, etc., that end up costing us billions.

Everything BUT SS, Medicare/Caid, and Defense is basically playing around the margins. We should be finished by now with fooling around with politically-popular but utterly irrelevant tiny little cuts to discretionary spending. We need big cuts in all the big 3, and we need more revenue.

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<ptp> how many emo kids does it take to change a lightbulb?
<Willy> HOW MANY?!
<ptp> none they just sit in the dark and cry

True enough. I'm just saying the equation has a few more variables than just "top tax rate greater than 35% = economic death".

The equation has 2 variables that matter...

X: Tax Revenues
Y: Tax $'s spent

When Y > X then we have a problem and you have two choices...

A Tax more
B Spend less

Every household in America deals with similar variables, just replace Tax $'s with income. and when a household continues to spend more than they have in income they go in debt and eventually go broke, file bankruptcy, etc.

This is why spending cuts have to take the front and center over tax hikes.

Everything BUT SS, Medicare/Caid, and Defense is basically playing around the margins. We should be finished by now with fooling around with politically-popular but utterly irrelevant tiny little cuts to discretionary spending. We need big cuts in all the big 3, and we need more revenue.

But we haven't cut around the margins, that's just it. That's like saying you can't afford your mortgage payment but you aren't willing to buy generic grocerires, stop smoking, eat out less, quit spending on alcohol, etc.

Fine, but that is "front and center", not "instead of". Especially when "instead of" will not happen under any circumstance.

I have said all along show me the spedning cuts. Once those are in place then and only then should we talk about tax hikes. The Congress ****ed the people into a hole and they shouldn't try ****ing them out of it because it won't work. Congress is the problem. Moreso congressional spending is the problem. You show me you are willing to live more within your means then we will talk about me giving you more money.

Kotter: "You are lucky I'm truly not the vindictive or psycho type...I'd be careful from now on, and I'd just back the hell off if I were you....otherwise, the Mizzou "extension office" life might get exciting"

I'm not suggesting that we hike the top rate back over 50% like it was before Reagan, but the 1950's and 60's didn't seem that terrible.

Listening to the right fringe, you'd think that if the top tax rate goes up just ~3% back to where it was during Clinton, we'd have a global meltdown and unemployment over 25%. There's obviously other things going on with jobs than just the top marginal rate.

I don't think we're at the optimal tax rate right now, either, but the 50s and 60s weren't THAT great.

Real GDP growth has always been shown to be higher in decades following a decrease in the top marginal tax rate as compared to an increase.

Plus, increasing the top marginal tax rate actually shifts the burden down to the lower and middle classes, and doesn't improve tax receipts to the Federal Gov't, which generally hovers around 7-8% of GDP, regardless of whether the top marginal rate is at 20% or at 90%.

GWB became prez...And he absorbed (the Clinton) blow, and still turned the economy around.

Turned it around? Started with a surplus & ended with the major investment banks facing imminent collapse, car companies facing bankruptcy, AIG positioned to crash the whole shebang & job losses nearing 800,000 per month, raised the debt limit seven (7) times... he turned it around all right